NAFTA: Introduction to “It is more than avocados, beer and cars”

There is a general misunderstanding about the trade of manufactured products between México and the United States. Much of the misconception comes from the notion that Mexico’s economy has not matured to the level that it has. Global trade is a complex issue involving many moving and dynamic pieces that goes beyond simply moving car production lines back to Detroit. Today’s general perception of Mexican imports is fruits and vegetables with beer sprinkled in between. The belief being that very few segments of the United States’ economy would be affected if NAFTA were to be cancelled. Thus, the notion is that although dismantling or imposing taxes on imports may hurt certain U.S. economic interests it would not affect the country, as a whole. Therein lies the problem with dismantling NAFTA or taxing imports, the repercussions would be felt in all economic segments of the United States.

More Than Avocados

Consider avocados. The United States, like most countries, has adopted the Harmonized Commodity Description and Coding System, better known as the Harmonized System, or HS for categorizing the vast amounts of products traded internationally. The HS coding allows countries to standardize products in order to control imports and exports as well as to tax them as necessary. Each commodity traded internationally has a consistent HS code applied to it. The larger number of digits the code has, the more granular the product is defined.

Avocados are coded under the 0804 HS code which includes edible fruits. The actual HS code for avocados is 080440. In 2015, México exported $14 billion in vegetable products to other countries. That is from a total $391 billion in exports in 2015. Of the total vegetables exported, $10.8 billion went to the United States. That is almost 80% of the total Mexican vegetable exports.

However, avocados only accounted for 14% of the total vegetable export market. Avocados are an interesting example because they are generally brought up as the Mexican export market and because Mexico is the largest avocado exporter in the world. Yet, avocados only accounted for less than 0.01% of Mexico’s total export market to the United States. [13]

In 2015, México exported $291 billion worth of products to the United States. Avocados were only $1.54 billion of that trade.

Cars dominated the 2015 Mexican exports to the United States at $24 billion, accounting for 8.2% of the total export market from México to the United States. The Mexican export market to the United States is diverse and encompasses many products that go beyond the avocados, beer and cars.

The diversity of the Mexican exports to the United States numbers in the hundreds. The products range from cars, automotive products to medical instruments and other commodities not normally associated with Mexican exports. For example, in 2015, México exported $5.06 billion in medical instruments (HS92-9018.) to the United States.

Supply Chains

To understand why resolving the trade imbalance between México and the United States by simply shifting manufacturing lines back to the U.S. is impossible, it is important to understand the concept of supply chains in manufacturing.

Nearly all U.S. citizens with pacemakers, a necessary lifesaving device, are using devices that contain parts made in México. The Mexican medical industry exports artificial respirators, catheters, defibrillators, intravenous bags and other medical equipment to the U.S. It is impossible to pick up the manufacturing lines, that are mainly in Tijuana, and move them across the border because medical equipment is heavily regulated by the Food and Drug Administration before it can be used on humans. It would take significant amounts of time to certify new assembly lines to produce medical equipment within the United States.

Supply chains are assembly lines that integrate parts and labor from many different parts of the world to produce the consumer goods. Simply moving a production line across the border involves complex logistics of necessary parts, equipment and complex readjustment of prices due to new tariffs and labor costs.

Another example is the Chevrolet Malibu, which is assembled in the United States. According to the National Highway Traffic Safety Administration, the 2013 Chevrolet Malibu has 25% of its parts that are imported.

The supply chain dilemma means that a car to be fully manufactured in the United States would require moving thousands of manufacturing lines back to the United States. An average car includes tens of thousands of components.

Even if the supply lines were to be moved back to the United States, the consequences would be a significant losses in efficiency resulting in higher costs and reduced inventory availability. As production lines are removed from countries, their incentive to keep lines open to fulfill U.S. parts needs would not exist resulting in production lines refocusing towards more economic feasible products.

The Made in America Car Fallacy

Even the iconic Tesla is not 100% U.S. manufactured because it relies on imports for some of its components. The most American made car is an import from Japan, the Toyota Avalon that has content that is 80% derived from the United States. The most American car on the market is the Dodge Avenger that includes about 76% components that come from within the country.

Most U.S. boys dream about the iconic U.S. muscle cars parked on their driveways. The funny thing is that the iconic Muscle cars are Mexican made. Even traditionally old-school Detroit steel muscle cars from yesteryear require a specific component that is only made in México, the HEMI engine, which is made in Saltillo, México. And it gets worse, the muscle car transmission, the Tremec TR-6060 six-speed transmission is exclusively made in México. Tremec is short for Transmisiones y Equipos Mexicanos SA de CV. It is based in Mexico City.

Today’s muscle cars, the Ford Mustang (GT350 and GT350R), the Chevrolet Camaro Z1, the Chevrolet SS all have a Tremec six-speed transmission in them. The Dodge Challenger SRT Hellcat has both the HEMI and Tremec transmissions that are made in México. The Dodge Charger SRT has a Mexican HEMI in it.

Clearly, the complexity of the global trade between México and the United States is much more than avocados, beer and cars.

Tomorrow, I will show you how diverse the Mexican exports to the United States really are.

4 thoughts on “NAFTA: Introduction to “It is more than avocados, beer and cars”

  1. Supply chains shift all the time. Case in point, Pena Nieto killed the TV industry in Mexico last year when he supported the move to classify and tax flat panels imported from Asia as a finished good instead of a component. Electronics are all built on common lines and much are outsourced to contract manufacturers with global facilities often with standardized production equipment. Shifting that production isn’t that difficult. Auto production lines and the automation for medical single use product assembly is customized and more difficult to shift, but if it does it is likely efficiency will increase not decrease because generally any retooling activity of that nature incorporates lessons learned. Qualifying a line for FDA isn’t that big an issue, companies do it all the time. At the end of the day what will really determine what companies do will be taxes and regulatory policy. That is a large portion of what drove them offshore. If those don’t change, it will keep them offshore even with a border tax.

Don't hold back, you know you want to comment, go for it!

This site uses Akismet to reduce spam. Learn how your comment data is processed.